Federal Reserve Chairman Walsh emphasized “zero tolerance” for inflation and reiterated that “policy system changes” will be achieved

The Zhitong Finance App learned that while attending the US House Financial Services Committee hearing on Tuesday, Federal Reserve Chairman Kevin Walsh reiterated that the Fed has “zero tolerance” for inflation that continues to be above target levels, and once again put forward a proposition to push the Federal Reserve to achieve “policy system changes.” He said that the Federal Reserve will comprehensively review the monetary policy framework and operation methods to ensure complete restoration of price stability.

Walsh said that continued high inflation over the past five years has become a heavy burden on American households and businesses, which is equivalent to levying an “invisible tax” on the economy. “We plan to eliminate this tax burden. This means we need to push for changes in the policy system and re-examine those policy practices that work or don't work.”

This is the first time since Walsh became chairman of the Federal Reserve in May this year that he has submitted a semi-annual monetary policy report to Congress. He said that the most important goal of the Federal Reserve at present is still formulating the correct monetary policy to ensure the complete end of the era of high inflation. “If we make the right policies, and we will definitely do it, the last five years of soaring inflation will be a thing of the past.”

Reiterates that the five special working groups of the reform plan comprehensively evaluate the operation of the Federal Reserve

Walsh explained that since taking office, the Federal Reserve has set up five special working groups to conduct a comprehensive evaluation of core areas such as monetary policy communication, balance sheets, economic data systems, productivity and employment, and the inflation policy framework.

He said that these working groups are currently comprehensively reviewing the Federal Reserve's current system and policy framework from scratch, hoping to form a substantial reform plan before the end of this year.

Walsh said that after only six weeks in office, new reform ideas have begun to be formed within the Federal Reserve. “We have promoted a profound shift in mindset and will push ahead with reforms in at least five key areas of monetary policy.”

Criticizing the old framework for high inflation and reaffirming the priority of price stability

Walsh once again criticized the “flexible average inflation target system” introduced by the Federal Reserve in 2020. The framework allowed inflation to rise above the 2% target for a period of time to make up for deviations caused by previous long periods of low inflation.

Walsh said that this policy failed to achieve the expected goals, but instead caused inflation to continue to get out of control. “Historically, more than one central bank wanted 'a little higher inflation', but in the end, it was exchanged for 'more inflation'. It turned out to be a mistake.”

However, Walsh pointed out that although the performance of the US Consumer Price Index (CPI) for June released on Tuesday was moderate, the overall CPI fell 0.4% month-on-month, and the core CPI remained flat month-on-month, and the year-on-year growth rate slowed to 2.6%, but he will not let his guard down due to the improvement in the monthly data.

“Some people might think that the data released today means that the mission has been completed, but I don't see it that way.” “We still have a lot of work to do, especially in terms of inflation,” Walsh said.

AI investments drive economic growth but also present new policy challenges

Regarding the future of the US economy, Walsh believes that the US economy as a whole has maintained steady expansion, the labor market is generally balanced, and corporate investment has become the most prominent highlight of the current economy.

He said that the rapid growth in demand for data center construction and artificial intelligence (AI) related equipment and software is driving the continuous expansion of corporate capital expenditure support.

“What is currently known as an 'AI investment' expenditure will probably only be an 'investment' in the ordinary sense of the word in the future.” he said.

However, Walsh also said that it is currently impossible to determine the extent to which AI will ultimately increase productivity in the economy, and the Federal Reserve will continue to pay attention to the impact of AI on inflation and the job market.

Emphasize that policy independence will base decisions on economic data

At the hearing, many lawmakers also asked Walsh questions about the independence of the Federal Reserve and US President Trump's continued demand for interest rate cuts. In response, Walsh said that no matter what kind of political pressure is applied from the outside world, the Federal Reserve will insist on formulating policies based on economic data.

When asked if Trump continues to publicly criticize the Federal Reserve, he will still make independent decisions based on economic data, Walsh answered, “Yes.”

At the same time, he stressed that the Federal Reserve will continue to carry out the dual mission given by Congress, which is to achieve price stability and full employment. Currently, the labor market is generally balanced, but there is still work to be done to control inflation.